Is China the
real deal in terms of big investment opportunities? We tend to think so.
Just look at the numbers. $1.4 trillion in GDP places the country at number
seven in the world, and with real GDP growing at +7% annually, it is clear that
China will be moving up this list. With 1.3 billion people, or roughly 20% of
the world’s population, and a middle class numbering 300 million, there is no
denying the fact that the Chinese market is large in size and ripe for
investment potential.
With the Chinese economy roaring along, it should be no surprise that our
favorite small cap growth stock for 2006 is Focus Media (Nasdaq: FMCN),
the operator of an advertising network in China utilizing audiovisual flat-panel
displays in office buildings and retail locations.
Founded in 2003, Focus Media has grown rapidly from a start-up to a national
out-of-home TV advertising network that reaches at least 20 million viewers per
day. Focus Media aims to provide a solution for advertisers seeking exposure to
consumers with higher quality demographics at appealing rates. Advertisers in
China continue to seek competitively priced advertising for affluent, white
collar workers with disposable income. It is still difficult to target consumers
through television, as there is a lack of premium television channels in China.
Focus Media is filling this void.
Focus Media is able to provide advertisers with access to 20 million viewers per
day in 52 cities, through a commercial advertising network that includes 23,000
displays in 14,000 locations. The company contracts with and rents space in a
commercial office building’s lobby and/or bank of elevators in which the company
installs flat panel audio/visual televisions. The ad network operates on a
12-minute cycle, with advertisers typically purchasing a 30 second spot that
rotates for 12-hours during high traffic periods.
In May 2005, Focus Media expanded its offerings through the launch of a point of
sale advertising network that aims to provide advertisers with the ability to
target consumers at the point of purchase, at the time consumers are in a store
considering products for purchase. While conventional point of sale advertising
might include posters or large display areas, Focus Media is taking this to the
next level by installing flat panel displays in retail locations and selling
airtime to advertisers in a similar manner to what the company has done in the
commercial space. Focus Media currently has roughly 12,000 displays through its
point of sale network.
Focus Media’s impressive growth since its inception in 2003 is nothing short of
amazing. In 2004, revenues grew 1,000% from $2.27 million in 2003 to $22.9
million.
Second quarter 2005 results demonstrate strong year-over-year and sequential
growth. Focus Media increased revenue 128% over Q2 2004 to $14.6 million. On a
sequential basis, revenues increased 52%. Net income for the quarter grew 119%
over Q2 2004 and 65% on a sequential basis to $4.3 million or $0.11 per diluted
ADS. The company ended the quarter with 39.5 million shares outstanding on a
fully diluted basis.
We are optimistic about the prospects for Focus Media and believe the company is
offering an attractive alternative to companies that wish to reach viewers
through television commercials. Focus Media aims to target a higher demographic
user than regular television by placing its flat panel displays in locations
trafficked by high-income consumers. With a network that reaches some 20 million
consumers per day, Focus Media is able to offer advertisers a vast range of<
consumers in China’s largest cities.
